Friday, April 30, 2010

Sri Lanka: Ready For Business



Interviewed by Megha Bahree - The Governor of the Central Bank of Sri Lanka, Ajith Navard Cabraal, is responsible for the monetary policy of his war-torn country. He's 55 years old, likes jazz and classical music, and doesn't eat fish because he has them as pets. He stopped in New York after the recent International Monetary Fund meeting in Washington, D.C. and spoke with Forbes' about reducing inflation, liberalizing the economy, and investment opportunities in Sri Lanka now that the 26-year war is finally over.

Forbes: What are you doing to put the economic fundamentals in place now that the war is finally over?


Ajith Nirvad Cabraal: Inflation is down from a high of 28.6% in June 2008 to 3-4% last year. We're taking a prudent approach and going forward we will keep a close tab on it. We didn't allow the [Sri Lankan] rupee to depreciate and we targeted reserve money strongly. Even the IMF told us that we were [perhaps] too strong but we wanted to get into shape quickly. One problem was high food prices and 2.5 years ago we took a fairly significant decision to double our paddy crop. Sixty percent of the population is in rural areas so we took care of the farmers and shifted income of 54 billion rupees ($475 million) from urban to rural [pockets]. Rice prices are down now [after initially going up in urban areas] because of higher yields.

Are you noticing any changes in the economy, or is it still too soon?

We can already see that the prices of fish and rice have gone down by 30% and 20% [respectively]. By the end of the conflict we were importing 80% of our milk and now that's reduced to 60%. All these are signs of development. The peace dividend is being absorbed by those who have suffered. There is $6 billion worth of work currently in progress, to improve the roads, the port, a new international airport is being built, new coal and hydro power plants are under construction. All of this had already set a stimulus rolling.

Where are the business opportunities?

Tourism is the biggest opportunity. On that front we have performed far less than our potential. We have ancient cities, beautiful beaches, great wildlife, but the conflict hindered all of that. We have a target of [attracting] 2.5 million tourists over the next three to four years. The change in the overall climate has had a good impact and there can be an increase in the production of tea, rubber and the apparel industries.

Are you doing anything specifically in the north, where the fighting was concentrated?

Traditionally people in the north have been farmers and fishermen. There has been an increase in demand of credit for boats, motors, agricultural implements and we are focusing on that.

Is there a plan to privatize the assets and the businesses held by your government?

The government has a fairly significant ownership, which will not be sold. Let the private sector compete. Government-owned banks are competing with private and foreign banks. If you take the banks here, it was the government that bailed them out with huge support schemes and the private sector policy had to depend on the government to rescue it. Moreover, people voted in favor of not selling. The other party campaigned on a platform of privatization and it lost. [That said,] there are plenty of private sector investments available. Anyone is free to set up a new conglomerate; there is no need to buy a government company to do that. The private sector will also be a good test for government institutions as they will have to compete as well. There are no special deals for the government sector.

From when do you know President Mahinda Rajapaksa?

I've known him since we were in college. He was studying law and I was studying accounting. Politics and economics go together. A long term economic agenda, if you attempt to implement it without political backing, it will fail. We have consciously done that Sri Lanka. We targeted reserve money and interest rates and these hurt the government tremendously. But I had convinced the president that it's essential to have long-term vision. He does and that's very comforting to me.

There's a power shift taking place in South Asia. Where do you think Sri Lanka is headed?

The Chinese have a strong appetite for infrastructure development and have projects of about $1 billion; the Malaysians are in the telecom sector; the Indians are in the road and rail sector with about $300-$400 million; American hedge funds have an appetite for government paper and Treasury bills and bonds of about $1.5 billion; the sovereign bonds have attracted about $700 million. People shouldn't have much concern if India or China enter Sri Lanka because if you look at the whole picture there are others as well.

© Forbes

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